S. Korea has fiscal leeway, cautious use required: report

SEJONG-- South Korea can handle up to a 180 percent debt-to-gross domestic product (GDP) ratio, but efforts are needed to control the overall debt situation and use of extra expenditures, a report from a state-run think tank said Monday.

The report from the Korea Development Institute (KDI) put the country's fiscal space, or the gap between the debt limit and the current total borrowing, at upwards of 225 percent of the GDP. South Korea currently maintains the ratio at 40 percent.

KDI's assessment stands between the 203 percent that the International Monetary Fund presented in 2010 and the 241 percent given by Moody's in 2014.

The local think tank, however, said its figure is contingent on South Korea staying on the current economic growth rate and fiscal spending levels. Any change to increase revenue for more fiscal space, for example, could shrink income and consumption, and demographic shifts could also blunt economic expansion while raising government expenditures for social security, the report pointed out.

Given these variables, the more reasonable fiscal space would be a ratio of between 40 to 180 percent of the GDP, it said.

Fiscal authorities need to be careful about increasing spending since fiscal space would narrow more from social security expenditures than from slowed economic growth, the report said.

"Efforts to manage fiscal debt, although weak, are improving. We expect such efforts to continue next year," the report said. "Future fiscal policy should be approached carefully, continuing these efforts while taking into account the risks of additional spending."

There should also be efforts to reduce the debts beforehand in order to save on mid- and long-term costs when conditions for revenue increasing are difficult to maintain, it said.